07:09 AM EST, 12/05/2024 (MT Newswires) -- France's coalition government led by Prime Minister Michel Barnier collapsed late Wednesday after parliament passed a vote of no confidence instigated by the extreme right and left.

The government will operate under a caretaker cabinet, with the 2024 budget likely to be rolled over to 2025, noted Societe Generale. Fiscal consolidation will be postponed.

Given the government's collapse, the bank expects the 10-year OAT-Bund sovereign bond spread to trade closer to SocGen's upside risk scenario, with the potential for a widening toward 100bps in Q1 and 110bps in Q2 2025, driven by risk aversion and the threat of higher supply.

Recent highs in 10y OAT-Bund around 90bps are consistent with a one percentage point increase in the deficit and a one percentage point decrease in growth relative to the forecasts in the International Monetary Fund's latest outlook, stated the bank.

SocGen pointed out it could see an increase in bill supply and eventually in OATs.

The recent momentum has resulted in talk of BTP-OAT convergence between the Italian and French sovereign bonds, but the bank estimated 25bps as a ceiling.